Tariff relief rally over? The announcement of a 90-day pause between the US and China in their trade war has driven a significant rally to above pre-Liberation Day levels. Since the beginning of May, the US dollar has rallied alongside higher US real yields and a stronger US equity market performance, suggesting that investors have become positive on the US exceptionalism theme once again. This was the consensus theme at the start of the year, but we believe it could be too early to position for the US to outperform again. In our base case, we see a 10% blanket tariff to remain for US imports. This, in combination with diminished labour supply on the back of an immigration clampdown, is likely to slow US economic growth and once again challenge the US exceptionalism narrative.

De-dollarisation index. Despite equities, credit and US Treasuries recovering some losses from the Liberation Day risk-off event, the USD has remained weak over the past month. This supports our view that a structural de-risking away from the USD is currently underway. Long-USD positioning reversed quickly in 1Q, but there is room for a further drop from multi-decade USD highs through portfolio and central bank reserve diversification, mainly into the EUR, but also the JPY, CHF and gold.

Looking ahead, we expect non-USD currencies to continue to benefit from the global de-dollarisation flows. Investors agreeing with our view could consider a basket of global G-10 currencies excluding the USD, AUD and NZD. We avoid the AUD and NZD due to their close economic ties with the Chinese economy, where growth could remain under pressure in the near term. We have weighted the currencies based on their GDP value to represent a proxy availability of liquid assets to absorb USD outflows.